Summit News

Fundraising recovering slowly - K&E

NEW YORK (Reuters) - Raising capital for buyout funds is recovering slowly, but convincing investors to write large checks remains difficult and takes time, the head of law firm Kirkland & Ellis’ Private Funds Group said on Monday.

“Probably the low point was some time last summer,” said Bruce Ettelson at the Reuters Private Equity and Hedge Funds Summit in New York. “You’re starting to see more money come to work, and it’s coming to work slowly,” Ettelson said.

Private equity funds raised multibillion dollar funds with seeming ease during the boom of 2005-7; but after the financial meltdown, fundraising fell off a cliff.

Still, as investors were spending little money on deals, there was no urgency to raise billions more cash.

While some firms have recently reported a loosening up in fundraising, investors remain tight-fisted.

Most funds are not oversubscribed, Ettelson said, meaning that there is no immediate rush to get them to a “first close.”

Funds typically go through several “closes” before a “final close” where they finish fundraising and begin putting the capital to work.

“So, it takes longer and it will continue to take longer for some time,” Ettelson said.

Funds that are struggling to spend money raised a while back have a different problem: whether to try to persuade investors to extend the investment period. Firms typically raise a fund with a commitment that it will be invested in a certain number of years.

“If you are a private equity fund coming up on the end of your investment period, should you go out and raise a new fund or ... do you extend the investment period and avert raising in this environment?,” Ettelson said. “And if you do, what are the terms in doing that? That is one of the upcoming industry discussions.”

Funds are unlikely to just push through deals under time pressure, he said.

“I don’t think most private equity people, who have fiduciary duties ... are just going to do an investment just to get it done.”

With returns under pressure, how much investors pay in fees has also been a hotly debated issue. On average, buyout firms take a 2 percent management fee from their buyout funds and keep 20 percent of the “carry,” or gains, from their deals, known in the industry as “2 and 20.”

“I still think that’s the predominant model for private equity buyout firms,” said Ettelson. “I think you’ll see more pressure on transaction fee offsets against the management fee.”

“The fee is a balance; you want to make sure there are enough high quality people there to achieve long-term capital superior appreciation,” Ettelson said.

Ettelson, based in Kirkland’s Chicago offices, has represented over 75 private equity firms in the formation of more than 200 private equity funds, according to the company’s website.

(For summit blog:

Reporting by Megan Davies; Editing by Richard Chang